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Income Tax Payment Process on Fixed Deposit Interest Income

Last Update Date : November 19, 2018

it on fd interest

Bank FDs are some of the most popular and favoured investment instruments, and a fundamental error most taxpayers commit is to ignore the income earned from them while calculating income for the year. Although most taxpayers are aware that “interest income” is taxable, Fixed Deposit interests are one of the most likely to be forgotten to include while filing tax returns. Further, many individuals think that bank FDs opened in the name of a minor or a non-working spouse can facilitate tax evasion. There is also a common misconception that since the bank deducts TDS, there is no need to report the income earned on Fixed Deposits. Such mistakes often can put taxpayers in a tight spot and eventually lead to a notice from the Income Tax department.

Correlation of Fixed Deposits with Income Tax

It is important to keep in mind that interest earned from Fixed Deposits must not be neglected while calculating or adding various income sources to generate annual tax declaration file. In other words, interest received from Fixed Deposits is “Fully Taxable” and is clubbed under the heading of “Income from other sources”. It forms a part of total income and tax needs to be paid on it based on the slab rates applicable.

What is the Relation between TDS and Fixed Deposits?

Banks follow an accrual method of TDS deduction. This means, after aggregating your total interest income made by the bank from all the FDs you have with the bank, which if exceeds the given threshold of Rs 10,000, it shall deduct TDS at 10%. Further, TDS is not deducted when the FD matures with the interest amount but is deducted every year or quarterly basis as and when it is earned (i.e. accrual basis).

For example, if you have a Cumulative Fixed Deposit that matures after 3 years, TDS will be deducted every year, although interest is not paid out or credited to your bank account every year.

Taxpayers must note that providing PAN details is a must to be eligible for TDS deduction at 10%, failing which banks deduct TDS at 20%. So, make sure your bank has your PAN details.

When is no TDS Applicable on FDs?

As a thumb rule, all interest income attracts tax and must be reported on the income tax return. However, in case of non-working individuals or senior citizens interest income in a year is more than Rs 10,000 but less than the minimum exemption amount of Rs 2,50,000 (below the taxable limit) then TDS is not applicable as per Section 194A of the Income-tax Act.

To avail this exemption, you will have to furnish the bank with a self-declaration in the prescribed forms 15G (for citizens under 60 years) or 15H (for senior citizens above 60 years) at the beginning of the financial year.

How to Calculate Income Tax on Fixed Deposit Interest Income?

  • Know your Tax Slab
    FD interest is taxable as per the tax bracket you fall under. Under the Income Tax Act, you must report your FD interest income while filing your Income Tax Return. Interest earned from fixed deposits can be offered to tax either on accrual basis or receipt basis, at the slab rate applicable to the person. It is advisable to offer interest income on accrual basis except where the interest income is substantially high, in that case offering the interest to tax on receipt basis can help you earn some additional interest on the amount of differed tax obligation.
    If the aggregate amount of interest income exceeds Rs 10,000 for the financial year, TDS is applicable. Given below are the TDS rates on Fixed Deposits for various investor categories:
  1. at 10% on interest to residents
  2. at 20% is applicable in the absence of PAN / valid PAN
  3. at 30.90% to Non-resident Indians

Recurring Fixed Deposits with banks also attract TDS @ 10% on interest earned like regular Fixed Deposits, given the same TDS rate of 10%,20% and 30% category.

Though the TDS is deducted from interest income at a fixed rate, it does not necessarily mean that your tax liability is completely discharged. Depending on the tax slab in which you fall after adding all your taxable income you may have to pay some additional tax on your FD interest. This can be better explained with bellow illustration.

Example showing the calculation of income tax on fixed deposit interest income

(Q) Rajiv falls in the tax bracket of 20% on his income. He has 3 Cumulative Fixed Deposits of Rs 100,000 each, i.e., the interest rate is compounded every quarter or year and payable at the time of maturity with the principal. The term of the Fixed Deposits is 3 years payable @7.5% annual interest rate. How is TDS going to be treated and what is the tax amount Rajiv is liable to pay?

(A) Rajiv will earn a total interest of Rs22,500 in the first year. The Bank will deduct TDS @ 10% on all the 3 FDs, i.e., Rs2,250. Therefore according to Rajiv’s tax slab, he has to pay the balance of Rs 2,250 as a tax with the applicable cess on his FD interest for the financial year.

You can use Form 16A (TDS certificate) provided by the bank or download Form 26AS (annual tax statement) to find out interest for the financial year and the TDS deducted from it. Include the interest income mentioned on these forms (Form 16A or Form 26AS) in your return.

Form 16A and Form 26AS are very important information tools that display the entire amount of income and tax paid on it. Hence it is advisable to preserve these documents for future references for taxpayers and authorities to track income and tax details.

  • While filing the tax returns, it is important for taxpayers to select the right ITR form. Below is a brief synopsis of ITR forms applicable to different individual categories:
    ITR Form No Type of Tax Payer Type of Income
    ITR 1 Individuals Income from Salary / Pension, One House Property, other sources (Interest etc.), having total income up to INR 50 Lakh
    ITR 2 Individuals and HUFs  Salary / Pension, One or multiple houses House Property, other sources, capital gains, income in the nature of interest, salary, bonus, commission or remuneration from a partnership firm, except income from profits or gains from business or profession under any proprietorship
    ITR 3 Individuals and HUFs Income from proprietary business or profession

How is Tax Saving FD Treated?

Tax Saving Fixed Deposits are a type of FD in which you can claim tax deduction under Section 80C of the Income Tax Act. However, the interest income is treated no differently than a regular FD. The only additional benefit over a regular FD is that you can claim as a deduction under Section 80C while filing returns. The current limit that is allowed as deduction is Rs 1.5 lakhs.

When to Pay Tax on Fixed Deposit Interest Income?

Your due date for paying tax after adding your interest income to your total income is on or before 31st March of the financial year. In case you have a large amount of interest income, the advance tax may apply to you, and you may have to pay them as per advance tax timelines.

Tax on interest from Fixed Deposits must be treated with due weight. In the case where TDS is not deducted every year, you must add the interest income to your total income. The implications of not doing so lead to increased tax burden with higher tax slab resulting in higher income tax payments in the year they are accounted. So, avoid the past mistakes if any when accounting for your income earned from Fixed Deposit interests and ensure that your tax returns are filed well on time!

How can H&R Block help you?

Saving taxes and filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. We have a team of in-house tax experts who can file your tax return accurately while giving you maximum tax benefits.

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